Friday, September 21, 2007

Real transaction cost for sharebuilder

Here's another secret ShareBuilder may not want you to know.

According to their broker records, 85% of ShareBuilder's purchase for plan participates are market order. And all these happen on the same day of week. If enough people signed on them and invested in less liquid stocks (the service itself is a brilliant idea), the market impact could be significant. Without using a broker specialized in trading for institutions and with their predictable buying pattern, long term investors are definitely paying for the price of slippage. Do we have a figure for it? My guestimate is as much as 0.57% for SIRI (why so many people are building their fortune on such a speculative stock at ShareBuilder?) or almost $6 for each $1000 automatically invested. The mileage may vary depends on the particular stock one invests in.

Transaction cost = Commissions + Spread-Cost + Market Impact

With an above average Spread-cost due to market order, a sizable market impact, the real trading cost at ShareBuilder is probably comparable with or higher than Scottrade.

Hopefully I am not getting more nastier surprise down the road.

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